Gold's relentless rally fuels scepticism about sustainability, says Ravindra Rao of Kotak Securities

Ravindra Rao

Gold has been the talk of the town for the last few days as it has been setting new highs every day. After breaking past the previous record high near $1,920 per troy ounce, prices quickly zoomed to $2,000 and are now skyrocketing near the next key level of $2,100.

Gold has been on an upmove for the last few months and the recent rally looks like an extension of it, however, what is worrying is the sharp rise that has come in such a short span. Year-to-date, gold is up nearly 35 percent but half of it has come in July and first few days of August.

Relative strength index, a technical indicator, has moved in the overbought zone on daily, weekly, monthly charts.

Also, worrying is the fact that we do not have precedence of such a move in near term history. If we take August into consideration, gold is up for the sixth consecutive month, a feat last seen in 2002.

The rally is largely dependent on a major factor which is weakness in the US dollar. The US dollar index has slumped to May 2018 amid diverging outlook for US and European economies and nervousness about US Presidential elections.

ETF buying is supporting gold, however, we have not seen a major boost in inflows. Gold holdings with SPDR ETF rose by about 63 tonnes in July slightly higher than 55 tonnes seen in June and less than the 66 tons inflow seen in May.

Gold's rally has also remained unaffected by continued strength in equity markets and weaker consumer demand in India and China.

The longer-term outlook for gold still remains upbeat owing to huge monetary inflow to help economies recover from the slump caused by the virus outbreak which might result in currency devaluation, higher debt levels and inflationary pressures.

However, the near term rally seems to be little overstretched and a brief correction cannot be ruled out. Whether it happens or not is all dependent on the US dollar. The US dollar index is holding near 2-year lows and the future trend may be dependent on US non-farm payrolls data as well as progress on a new stimulus package. A better than expected jobs report or a deal on stimulus may be enough to cause a short-term rebound in the US dollar and a correction in gold.

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